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Considered one of the finest traders of his generation by some, dismissed as a 'bull in a bull market' by others, few in the hedge fund industry divide opinion like the ‘Wizard of Oz', writes Harriet Agnew.

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Shortly after the London markets closed on Wednesday, October 17, the news of Greg Coffey’s retirement flashed up on the computer screens at the hedge fund Moore Capital Management. Coffey’s decision – which he explained, in a letter to investors, came from a desire to spend more time with his family and in his native Australia – marked the end of a career that spanned two decades and, for many, epitomised the volatile performance of the hedge fund industry.

Despite his colleagues’ initial shock at the manner of the announcement (it was the first they had heard of his departure), few were surprised by its substance. Ever since 41-year-old Coffey joined Louis Bacon’s Moore Capital four years ago, his performance had failed to live up to the stellar returns he delivered at rival manager GLG Partners, where he built his reputation and earned himself hundreds of millions of dollars by outperforming both the markets and other hedge funds in the heady bull market of 2005 to 2007.

A restructuring a year ago, which resulted in Coffey spinning out his own stable of funds under a separate brand within Moore Capital, had encouraged speculation that he was planning to strike out on his own. And, as 2012 progressed, Coffey’s performance underwhelmed and investors voted with their feet, leading many to conclude that his days at Moore Capital were numbered.

One person with knowledge of the hedge fund said: “We knew it was a matter of time. Unless you’re making money you won’t survive at Moore.”

Several hedge fund luminaries have announced their retirement this year against a backdrop of market volatility heightened by policy intervention. Last week, the former Goldman Sachs head of principal strategies Pierre-Henri Flamand said he was shutting down Edoma Partners after two years “because I don’t think I can make money in this environment”. A few days earlier Geoff Grant, founder of $1bn global macro manager Grant Capital in the US, told investors he was shutting down, saying that he did not have an “edge” in current markets. Over the summer, Bacon himself announced he was returning $2bn to investors, as opportunities “are becoming an oasis in an investment desert”.

But Coffey, more than most traders, divides opinion. His varied track record makes it difficult for investors to speak about him dispassionately, as their experiences are coloured by when they invested in his funds. Bacon once described him as “the most impressive trader I’ve ever seen”, and a managing director at an investment bank who has known Coffey for more than a decade said: “Greg is in tune with what’s going on across markets and assets in a way that few can match”. But Jacob Schmidt, chief executive of independent research firm Schmidt Research Partners, said: “I was never so keen on Coffey, either at GLG or at Moore. He was considered a superstar at GLG – he was very successful and produced outsized returns. But these were the easy times, during 2005 to 2007. Coffey was a bull in a bull market and he made money.”

Moreover, some of Coffey’s former investors at GLG have never forgiven him for resigning from the firm as returns began to sink.

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Since 2004 Coffey has delivered annualised returns of 22% a year, according Financial News research based on investor letters from GLG and Moore Capital. Over the same period, the S&P 500 index has risen by an average of 2.92% a year. But the biggest loss came when his GLG fund was at its largest – from a peak of $5bn of assets, it fell 36.63% in 2008. It is hard to establish responsibility for the performance during this period. Coffey told friends that he lost control of investment decisions between his resignation in April 2008 and his departure six months later in October. However, a person working at GLG insisted Coffey was responsible for the funds and their track record until his departure.

Hilmi Ünver, chief investment officer of alternatives at Notz Stucki in Geneva, which invested with Coffey at GLG and Moore Capital, said: “We have no hard feelings. He’s an honest man and we always expected him to be volatile. He’s a risk taker.”

• The boom years

After graduating with a degree in actuarial sciences from Macquarie University in Sydney in 1994, Coffey worked as a trader at Bankers Trust and then Blue Border Partners, a small Soros-backed hedge fund in London. When Soros withdrew money from all of his funds at the end of 2002, Coffey was out of work. He got in touch with GLG managing director Philippe Jabre. After a short interview, he was politely told there was no position for him at GLG.

In April 2003, Coffey began working at Bank Austria. For roughly the next six months he sent Jabre details of every single trade he did via his Bloomberg terminal. Finally in November of that year, Jabre invited him in for another interview and Coffey was hired. Initially he traded a portfolio that was part of a bigger fund before launching his own, the GLG Emerging Markets fund, in November 2005.

A former colleague from GLG said the emerging markets fund “was a bit of a misnomer”. He explained: “It was always more of a macro fund [a strategy whereby managers take positions in a range of assets according to their views on global macroeconomic events]. He did a lot of pre-IPO [initial public offering] deals and took illiquid positions.”

Schmidt said: “It was difficult to see how he made these returns from investing in emerging markets at GLG. He always had huge positions in S&P futures – not what I would call traditional emerging markets assets. Aggressive risk taking was very much part of the outsized returns.”

A former employee at GLG confirmed that despite its name, “the fund was always marketed to investors as a macro fund”.

Coffey’s trading style was certainly intense: he turned over his entire portfolio up to five times a day and ran a book that was 10 to 20 times levered, making him one of the biggest players on the street, according to a number of brokers.

In early 2006, Jabre, Coffey’s mentor and one of GLG’s top money-makers, left the firm after an investigation by the UK’s Financial Services Authority for alleged market abuse for which he was eventually fined £750,000. A former senior manager at GLG said: “[GLG founder Noam] Gottesman was so anxious to keep portfolio managers on board that he gave them full autonomy and a better cut of the performance fees they generated. Management didn’t look too closely at what the traders were doing as long as they kept making money.”

And for the next two years, make money is exactly what Coffey did. The GLG Emerging Markets fund gained 60% in 2006 and 51% in 2007, according to investors. He was handsomely rewarded, earning $300m in 2007, compared with the $350m earned by Gottesman and GLG chief executive Manny Roman, according to a survey by Institutional Investors’ Alpha Magazine, now AR Magazine.

During this period, Coffey bought two mansions in Sydney. Two years ago, he bought an 11,500-acre estate on the remote Scottish island of Jura, where George Orwell finished writing Nineteen Eighty-Four and where Coffey now plans to build a golf course.

Between 2005 and 2007, there were two things other than his trading ability that worked to Coffey’s advantage, according to an investor at the time. Because he was trading so actively, he became a valuable client to investment banks, and was at the front of the queue when IPOs and other deals came to market. Secondly, he invested in some fairly illiquid emerging markets positions and, as his fund grew, the sheer size of his investments helped push prices up, according to several investors.

In March 2007, GLG launched the GLG Emerging Markets Special Situations Fund specifically to enable Coffey to take further illiquid positions. It locked investors in for three years. The fund gained 36.2% in the remainder of 2007 then lost 48.5% in 2008, according to an investor letter.

The Coffey camp rejects the idea he was “a bull in a bull market”, noting that he often made his money from short positions when the value of assets declined. In May 2006, for example, Coffey’s fund gained 0.46% when emerging markets tanked, according to an investor. He also made substantial returns in late 2007 from aggressively shorting US banks, sub-prime securities and mortgage reinsurers, having previously made a lot of money being long earlier in the year, according to one of GLG’s brokers: “The legend was born in the months where he was flat and markets were down. People had no idea about how much work and activity went into him being flat.”

In June 2007, GLG announced it was listing in the US via a reverse merger with a publicly traded company, Freedom Acquisition Holdings. It embarked on an aggressive marketing push to raise assets and therefore increase the listing value of GLG, which was based on a combination of current assets under management and forecast earnings.

The GLG Emerging Markets fund, which contained $2.65bn in July 2007, roughly doubled to $4.99bn by the end of December, according to GLG’s 2007 annual report. A former GLG employee said: “The sales team was very aggressive selling him because on the back of his returns it was an easy sell. But the investors were also coming to him. GLG almost created a myth around him.” However, some investors believed the fund was becoming unwieldy and redeemed. One said: “In the second half of 2007, they started marketing very aggressively. The fund became extremely large.”

• His greatest trade?

Coffey was GLG’s main fee earner by this time, according to company results, but Coffey was telling friends and investors he thought he wasn’t getting his due recognition from GLG. An investor said: “We started to feel he was having problems with management.” Coffey’s irritation was compounded by minor grievances, such as his bosses’ refusal to let him sign the Christmas card they were sending to investors in December 2007, the investor said.

In March 2008, as the US investment bank Bear Stearns collapsed, Coffey’s fund lost 8% and the following month the fund was down 14%, its biggest monthly loss up until this point, according to investors. A former colleague at GLG said: “Greg’s a street-smart kind of guy more than a highly technical macro guy as often portrayed. He’s more instinctive. When Bear Stearns collapsed, I don’t think he was prepared. The falling markets became a self-fulfilling prophecy. It can have quite a strong psychological impact on your ability to stick to your positions. If he was a technical trader, it would have been easier.”

A filing with the US Securities and Exchange Commission, dated April 15, 2008, shows that Coffey resigned from GLG on April 14, only to withdraw his resignation the following day. It adds: “Coffey and GLG are in discussions concerning a range of options for the future.” On April 22, GLG announced that it had accepted Coffey’s resignation and that he would continue to run the funds until October 2008 to ensure a smooth transition. GLG believed at the time that he was the best-placed person to manage the positions in the fund, several people at the firm said.

By resigning, Coffey forfeited a retention package of somewhere between $180m and $250m in cash and GLG shares, according to several people with knowledge of the matter. A fund of funds investor said: “It was a battle of wills Greg was never going to win with [GLG chief executive] Manny [Roman]. In the end, everyone lost – the investors in the funds more than anyone.”

Roman declined to comment for this article.

• Caught in a trap

Despite the big losses in March and April, Coffey’s reputation was still riding high on the back of the previous two years’ gains. A Sunday Times profile in April 2008 christened him “the Wizard of Oz” in a nod to his Australian heritage and trading prowess.

So intense was his focus on his positions that he was online all the time, no matter where he was in the world. His trading hardware would be assembled on ski-ing holidays, and his wife referred to his favourite brokers as his “other wives”, according to friends of Coffey. A broker said: “Every time I got a call from Greg pretending to be speaking to the plumber or the builder, I would automatically start updating him on his positions. It was his way of checking in without his wife getting mad.”

Although Coffey was still working at GLG, he told friends he felt like a bystander: he said he was not allowed to make investment decisions but was given trades to execute because it was thought he would get the best price in the markets. A person at GLG strongly rejects this and says Coffey was responsible for portfolio management and the fund’s performance until his departure.

Following Coffey’s resignation, a large proportion of investors redeemed, according to company filings. A letter sent to investors by GLG, dated May 6, 2008, said that up to 15% of assets in the main emerging markets fund were invested in illiquid positions that could not be easily sold. These positions were typically non-listed securities in private companies and mid-cap stocks. Thinly traded positions included a private equity investment in Sibirskiy Cement, a Siberian cement producer, and the bonds of Brazil’s Banco PanAmericano, according to investors who were briefed on the positions.

Such positions are typically hard to value and can either be marked in the portfolio at their purchase price or their market value, which can have a big impact on fees charged.

Illiquid assets were moved into two separate side pockets in July and November 2008, according to investor documents. To the chagrin of investors, GLG continued to charge a 2% management fee on these assets as they unwound them. In May 2011, investors were able to exit their positions in one of the funds in an auction overseen by Blackstone Group, GLG confirmed at the time. Clients sold their holdings in the fund for about half of their net asset value, investors said.

A former colleague at GLG said: “I rate Greg as a trader. I don’t rate him as a private equity investor.” Coffey is understood to regret investing in unlisted positions – a sector of the market that wasn’t his real area of expertise. However, the Coffey camp claims that these holdings represented only a small fraction of the entire portfolio.

A letter to investors in the GLG Emerging Markets fund in early June 2008, reporting gains of 5.12% in May, said that a large part of the portfolio had been unwound to meet redemption requests and it had shrunk to about $2bn. It was the last investor letter Coffey wrote at GLG.

The fund ended 2008 down 36.63%, after falling 7.45% in August, 7.52% in September and 13.70% in October, the nadir of the financial crisis. Several investors and former colleagues claim that Coffey should not have, in the words of one, “abandoned” his investors and left GLG at such a volatile time.
However, some investors felt that GLG was too quick to blame Coffey. One said: “The responsibility has to be shared. These firms are regulated; they can’t just blame the portfolio manager. Success has many fathers but failure is an orphan.” A person at GLG insists the firm always had good risk controls in place.

The Coffey camp denies that he neglected investors and claims that he acted in their best interests in so far as he was able to.

• Moore underperformance

When Coffey resigned, he initially planned to launch his own hedge fund. He held discussions with several parties, including John Mack, then chief executive at Morgan Stanley, which was the lead contender to seed Coffey’s new fund and take a stake in it, according to several people with knowledge of the discussions. Morgan Stanley declined to comment. But conversations with Bacon in the spring of 2008 convinced Coffey to shelve these plans, choosing to avoid the administrative hassle of setting up on his own.

In November 2008, Coffey landed at Moore Capital, which shares the same building as GLG at 1 Curzon Street in Mayfair. It was in the car park of these offices that Coffey was said to have bumped into Bacon, kick-starting talks about Coffey’s future.

The proximity to Coffey’s former employer made for some interesting lift encounters. A Moore Capital employee said: “After we hired Greg, the GLG guys were laughing. We’d bump into them in the lift and they used to say that given we had taken Coffey off their hands, could we take his illiquid positions too.”

But Coffey’s move was also raising questions at Moore Capital. Why did Bacon – a man who “doesn’t normally give equity”, according to a person who has known him for years – hand over a stake of between 10% and 25% in Moore Capital Management LP, according to SEC filings (which only requires companies to indicate a range), and the title of co-chief investment officer to a man he’d never worked with before?

For Coffey, the equity stake and job title provided the recognition he had craved at GLG. But it created tensions in Moore Capital’s London office. A person who worked at the firm said: "The big problem was that no one felt like Greg deserved it. Two or three years are generally not enough to prove that someone's good, especially in one cycle."

The plan was for Coffey to be the face of Moore Capital in Europe. Initially Coffey co-managed the flagship Moore Global Investments with Bacon but it quickly became apparent to both of them that two such strong personalities could not run it together. So, in December 2008, Coffey took over the management of the Moore Emerging Markets fund.

For the first year, the fund performed in line with its peers, gaining 20.43% in 2009 when the average hedge fund was up 19.98%, and the average macro fund gained 4.34%, according to investors and hedge fund data provider HFR. But the following year the fund was up only 5.01%, underperforming the average hedge fund by more than five percentage points and the average macro fund by three percentage points.

The risk management processes at Moore Capital and GLG are very different, according to investors familiar with both firms. One said: “At Moore, there’s much more scrutiny about what’s going on in the portfolio, what’s working and not working. They don’t want to lose money. GLG is more volatile. The idea of the ‘star trader’ suited them.” A person at GLG said Coffey was always supervised and acted within the firm’s risk limits.

Coffey’s history of posting large monthly gains and losses at GLG stands in stark contrast to the culture at Moore Capital, where the general policy is that if a trader is down 5% there is a review, down 10% means a reduction in risk and down 15% results in termination, according to a portfolio manager at the firm. In February 2010, Coffey’s emerging markets fund fell 7.54%, according to investors.

The Coffey camp rejects the notion that he was hampered by the Moore Capital trading style, arguing that in fact he moved there to “reinvent” himself as a less volatile performer. However, an investor in Coffey’s fund at Moore Capital said: “There were a lot of clashes between Greg and the risk guys. He wanted to take more risk but was always reined in.”

In the three years to October 31, 2011, Coffey’s emerging markets fund gained an average of 6.2% a year, compared with the average hedge fund, which rose 7.6% a year in the same period, according to HFR. During the first 10 months of 2011, Coffey’s fund lost 6.20%, according to investors, and the following month Bacon announced a series of changes to the structure of the fund.

• Changing gear

In a letter to investors, Bacon called the restructuring a “rebranding exercise”, with most clients in Coffey’s old fund transferring their assets to the new one, the GC Emerging Markets fund. This was designed to allow Coffey to take more risk, with greater potential rewards, and create his own family of funds with his own brand.

But the new set-up proved to be relatively short-lived. Coffey failed to deliver more than the industry average. Coffey’s main emerging markets fund lost 5% last year, when the average hedge fund fell 5.25% and the average macro fund lost 4.16%, according to Hedge Fund Research.

External investors’ assets in the macro fund fell from about $1.6bn in 2010 to about $450m by October, according to investors. The fund fell about 10% in the year to August 2012 before making back these losses in September, according to investors. But Coffey had had enough. He told friends he had decided that his intense commitment was not sustainable. Over 90% of capital has already been returned to investors, according to two investors in the fund.

Bacon told Financial News: "I was sad to see Greg go. It had been a profitable and helpful partnership. I was as surprised as everyone when he handed in his chips after making back his year to date losses with a 12% run in the fund which was his sole responsibility. But that is the elegant way of departing, on the up rather than on the down, and that is Greg. He is always a very up-beat gentleman."

For now, Coffey is enjoying spending time with his family. Last week, he turned up at his children’s school dressed as Dracula for Halloween.

An old friend who works at an investment bank said: “Coffey’s trading style was like a Ferrari that operated in sixth gear all the time. Before the financial crisis, the markets were conducive to that. Now we’re in a market where you can’t get out of third gear, and there’s no sign this is going to change. That doesn’t suit him.”

--write to harriet.agnew@dowjones.com

--Note: An early version of this article was published on the website in error on Sunday night, removed and then reposted on Tuesday morning.